The Real Deal New York

Fee war between private equity firms and pension funds is heating up

The country’s big public pension plans are increasingly unhappy about the high fees fund managers charge them. The question is: do they have any viable alternatives?

“With fundraising so robust, managers could say, ‘Look, you guys are too difficult, I’m not going to put up with that, and I will fill your subscription with somebody else,’” Karen Rode of fund manager of advisory firm Aon Plc told Bloomberg. “Demand is so great, limited partners don’t have negotiating power.”

In recent years, the investment returns from private equity and real estate investment funds have fallen, but fees haven’t. Firms like the Blackstone Group, Apollo Global Management and the Carlyle Group still generally charge management fees of 1.5 to 2 percent and performance fees of 20 percent of profits.

Big pension funds are increasingly grumbling about that. “We don’t own alternative investments. They own us,” Dale Folwell of North Carolina’s public pension system told Bloomberg.

In a bid to appease their biggest clients, some private equity firms allow them to invest directly in deals alongside their funds — a maneuver that avoids fees. “We feel we’d rather partner with our general partners than compete against them,” said Eric Lang of TRS.

CalPERS, meanwhile, is trying to grow its own investment operation. But that requires plenty of staff and expertise and isn’t easy, said Jim Leech, who built up the Ontario Teachers’ Pension Plan Board’s direct investing arm.

“It took Teachers’ more than 16 years to build the machine it has now,” he said. “You don’t do it in 10 months.” [Bloomberg] — Konrad Putzier